In a recent survey of business owners and entrepreneurs, fewer than 10% understood the logistics of business credit, or even knew it existed. Establishing credit for your business can open up loans, lines, better rates, new partnerships to leverage, and help you bypass your competition. But Business is credit is a totally different animal. For instance, scoring ranges from 0-100, with 75 or more considered a great score, online the 300-850 model of personal credit.
Not having credit for your business doesn’t just hurt you in terms of opportunity cost – it could be damaging to your business and cause great harm to your personal finances we well.
The worst mistake a business owner can make is to not separate their business credit from their personal credit. If something goes awry with your personal finances your business will be vulnerable to liability and recourse. The corollary is also true – if your business is sued or goes through a financial problem, creditors and courts will be able to come after you, personally. Shielding yourself from liability is a good enough reason to establish credit for your business but there’s another imperative – not having credit for your business can hurt your personal score.
Why is that? Most people average 11 debt obligations and 1 inquiry per year on their personal credit reports. However business owners tend to have more debt obligations and many more inquiries when their personal and business credit is comingled. In fact, it usually doubles the number of inquiries and credit lines. This is seen as a major red flag to the credit bureaus and your personal score will sink.
Here is everything you need to know about establishing business credit:
1. Incorporate.
The most important step to separating your business from your personal affairs is setting it up as a legal entity. Some business owners file under a sole proprietorship or partnership, but those are not legal entities and offer no protection. Instead, file as an S Corp, C Corp, or Limited Liability Company (LLC.) Your tax professional should be able to tell you more and help you set these up.
2. Register.
It’s easy to register with the major business credit bureaus so they will acknowledge your new business formation. They are Dun & Bradstreet, Experian Business, Equifax Business, and Business Credit USA. You can find instructions on their websites.
3. Get your statements and plan in order.
Write up a comprehensive, professional business plan and make sure your financial accounting is airtight. When it comes to opening new lines of credit or other business dealings, banks will want to see this paperwork.
4. EIN number.
Once you’ve formed your business entity, request an EIN number from the IRS. This will replace the social security number you used when your business was really just you.
5. DUNS number.
Dun & Bradstreet is the largest register of business credit information so it’s wise to apply for a DUNS number. By having one, Dun & Bradstreet will create a profile on your business and open up reporting to many other entities.
6. Open bank accounts.
Now that you have an EIN, proper legal entity, and financial documents in order, it’s time to head to your bank and open up a checking and savings account. The savings account plays a big role so don’t forget about that one.
7. Apply for commercial credit lines.
To effectively build your business credit score, start by asking each of your vendors and service providers to put your bills in the name of the business, using the EIN and DUNS number. This incudes your phones, Internet, bottled water, cleaning, crews, sub contractors, etc. It would be best if they did this without a credit check or personal guarantee.
8. Get a loan.
Even though your business credit hasn’t been built up sufficiently to obtain a loan yet, you will be able to take out a small, secured loan in the name of the business using your savings account as collateral. This is a stepping-stone to establishing a great business credit profile.
9. Pay on time.
Of course you need to make all of these payments on time, as well as file appropriate IRS forms to be in compliance so your new business credits score will grow.
10. Help reporting.
Unlike personal credit, businesses aren’t mandated to report your information to the business credit bureaus, so it’s wise to help them along. Do this by contacting the bureaus and providing documentation that you have accounts in good standing under your business credit, not personal.
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